Brexit: Inequality and the EU

The left wing case for Brexit often features reference to growing inequalities made worse by the EU. Most of these accounts seem to reflect a lack of knowledge about how the EU operates, or a simple cognitive bias, according to which many people think that if an individual’s (themselves) relative wealth deteriorates, it must be a sign of increasing inequality. When looking at the evidence, focusing on simple EU-wide trends, the data does not support the argument that the EU makes Europe a more unequal place. However, when focusing specifically on the UK, it appears that income inequality is reduced for most  individuals in the UK, but the gap between the most developed and most deprived regions has grown.

When it comes to judging how the EU affects inequality, my opinion is inevitably biased. I was born 14 years before the wall came down. Having not been favoured by the communist regime, my parents did not have the wealth or the opportunity to get a degree. Yet, despite us being fairly poor, they managed to support me through to graduation. As a young graduate I got a semi-respectable job, and I was on course to spend the following 40 years of my life toiling away in a perfectly meaningless job. Then in 2004 my country joined the EU. This opened up a window of opportunities that previously I wouldn’t even have dreamt of. I was free to move to Britain, do an MSc and a PhD, and grow into an academic who now advises institutions such as the World Bank, the OECD, or the European Commission. Without the European Union I would have never been able to break out of the bracket of wealth and opportunity distribution that I was born into. For me the EU is undoubtedly a story of diminishing inequalities.

The data seems to support my anecdotal evidence. The table below shows a measure of income inequality (Gini coefficient) for EU member states, for the period 2006-2014. The Gini coefficient measures how unequal the distribution of a given thing (here income) is. On a scale between 0 and 100, 0 signifies the most equal, and 100 stands for the most unequal case. The period 2006-2014 contains the time of Great Recession, which, many claim, increased inequalities. The last column of the table shows how much the Gini coefficient changed in this time period. The table implies that in more than half of the EU member countries income (!) inequality was reduced (highlighted by shading, showing a reduced Gini coefficient). Many of these were new accession countries (Eastern Europeans to use the British collective noun). On the whole, however, at the EU level there is a small increase in income inequality. As far as Britain is concerned, income inequality has actually dropped – by a tiny margin.

Table 1 – Gini coefficient of equivalised disposable income (source: Eurostat)

t1

So where does the dissatisfaction come from? Clearly, there are painfully deprived areas in Britain that are getting worse and worse – especially in comparison to many parts of London. How come the data ignores such observational evidence? To answer this question I looked at how various regions of the European Union compare. The EU has 98 regions at NUTS 1, 276 regions at NUTS 2 and 1342 regions at NUTS 3 level. The EU delivers Structural and Cohesion Funds, aimed at reducing inequalities across these regions. These Funds redistribute a large amount of money to the least developed regions. For example, available funding under EU cohesion policy for the period 2014-2020 amounts to €351.8 billion. One would expect that this would reduce inequality across the regions. Again, data from Eurostat confirms this. On EU level, income inequality across regions dropped by 3.6 points.

The interesting story appears when one compares how the equality of regions within each country changed. The table below shows that in around half of the countries’ regions (shaded in the table) have become more equal in terms of their GDP and income. Looking at the UK we find something interesting: regions in the UK became more unequal. So we have two seemingly contradicting findings: (1) At the level of individuals’ income, the UK became a more equal country (although it is still relatively more unequal when compared to others in the EU). (2) At the level of regions, cross-regional income inequality increased in the UK.

Table 2 – Measuring the inequality of income across EU NUTS2 regions (source: Eurostat)

t2

The only explanation consistent with this finding is that income inequality is reduced for most in the UK, but areas that are very deprived got even worse. And this is happening DESPITE, and not BECAUSE, of the EU’s best efforts to reduce regional differences by its Structural Funds. So either there’s something fishy in the UK, which stops Structural Funds from getting to where they are destined, or these Funds do reach the undeveloped regions and without them things would be even worse. Either way, one can hardly blame the EU for increasing inequalities. (For a statistically credible identification of these effects one would need a good counterfactual).

(Two caveats: (1) There are other measures of inequality, such as wealth, which might show different results, (2) I did not consider how the EU improves opportunity equality – opportunities like the one I was given as a young European.)

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